Shields Company has gathered the following data on a proposed investment project:
$\begin{array}{|l|r|}
\hline \text { Investment Required in Equipment } & \$ 400,000 \
\hline \text { Annual Cash Inflows } & \$ 80,000 \
\hline \text { Salvage Value } & \$-0- \
\hline \text { Life of the Investment } & 10 \text { years } \
\hline \text { Discount Rate } & 10 \% \
\hline
\end{array}$
(Ignore income taxes in this problem.)
-( The net present value on this investment is closest to which of the following? (Do not round your intermediate calculations.)
A) $76,750.
B) $80,000.
C) $91,565.
D) $400,000.

Question

Quizplus · Accepted Answer

The net present value (NPV) of an investment is calculated by discounting the future cash inflows back to their present value and then subtracting the initial investment. Given the annual cash inflow of $80,000 over 10 years and a discount rate of 10%, we can use the formula for the present value of an annuity to calculate the present value of the cash inflows. The formula for the present value of an annuity is $PV = P \times \frac{1 - (1 + r)^{-n}}{r}$, where $P$ is the annual cash inflow, $r$ is the discount rate, and $n$ is the number of periods. Substituting the given values:$PV = \$80,000 \times \frac{1 - (1 + 0.10)^{-10}}{0.10}$$PV = \$80,000 \times 6.14457$ (using the annuity factor for 10 years at 10%)$PV = \$491,565.60$Subtracting the initial investment of $400,000:$NPV = \$491,565.60 - \$400,000 = \$91,565.60$Therefore, the net present value of the investment is closest to $91,565.

Shields Company Has Gathered the Following Data on a Proposed